Markets unmoved over Venezuela's partial oil halt

MomingZhou

SAN FRANCISCO (MarketWatch) -- Venezuela has halted oil supplies to Exxon Mobil Corp., but the trading in crude-oil futures Wednesday showed that the energy market hasn't taken the Latin American country's action as a bullish catalyst.

Venezuela's move taken late Tuesday was seen as largely symbolic, as it only cut off oil supplies to Exxon Mobil, although President Hugo Chavez has in the past threatened to cut off all U.S. shipments. At the same time, supplies to refineries jointly owned by Venezuelan and U.S. entities won't be disrupted.

Exxon Mobil, the largest energy company in the U.S., accounts for a small part of Venezuela's crude exports to the U.S. The country's total exports to the U.S. stand at about 1.2 million barrels a day, or about one-tenth of U.S.'s total imports.

Crude-oil futures for March delivery traded mostly lower to start Wednesday, recovering only after a U.S. government agency reported that the nation's crude inventories rose less than expected last week.

In light of the small amount of crude involved in the cutoff, the impact of the weekly U.S. inventories numbers ranks as more significant to oil traders, said Edward Meir, an energy analyst at futures brokerage MF Global.

The Venezuelan exports to Exxon Mobil "can be easily made up elsewhere," said Phil Flynn, vice president of futures brokerage Alaron Trading. "It's not like we're in short supply of crude."

Chavez ordered the halt after suffering a key legal setback last week in what has become an increasingly bitter dispute over Venezuela's seizure of stakes that Exxon Mobil held in two oil ventures. Exxon Mobil said last week it has won court orders in three nations freezing at least $12 billion in Venezuelan assets. See full story.

Flynn also noted that Venezuela still has to find a place to ship its oil -- which may end up in the hands of Exxon Mobil as other countries could buy the Venezuelan crude and turn around and ship it to the U.S.

Venezuela isn't halting all its U.S. exports because it can "ill afford to cut off its main source of fiscal revenues at a time when Chavez is planning to keep up spending to buttress his political position," said Patrick Esteruelas, analyst at research firm Eurasia Group.

Oil exports account for more than 90% of Venezuela's total exports and for more than 50% of its fiscal revenues -- figures underscoring Venezuela's failure to diversify its economy, according to Eurasia. Indeed, more than half of Venezuela's oil exports end up in the U.S.

Venezuela is the world's ninth-largest oil producer and fourth-largest oil exporter to the U.S., according to EIA data.

To be sure, the futures market has reacted in earlier sessions to the conflict between Exxon Mobil and Venezuela. Oil prices rose nearly $2 a barrel on Monday, gaining after Chavez threatened an export cut to the U.S. See Futures Movers.

But when Venezuela ended up halting only its exports to Exxon Mobil, the market largely took this to be bearish for oil, on balance, instead of bullish, said Alaron's Flynn.

In a higher market for U.S. equities, shares of blue chip Exxon Mobil
XOM, -1.56%
added more than 1% to close at $85.49.

Conflict to drag on

The spat and legal actions between Venezuela and Exxon are likely to drag on as Venezuela "has staked a very aggressive position and will be reluctant to settle with Exxon," Eurasia's Esteruelas said in email comments.

A quick settlement with Exxon will heavily undermine Venezuela's push for controlling stakes across the nation's oil and gas industry, Esteruelas said. Venezuela also fears that a settlement will encourage other companies with similar or larger claims, including ConocoPhilips
COP, -1.58%
to seek compensation.

Last summer, as a major step to nationalize its oil resources, Venezuela seized majority stakes in four oil ventures. Venezuela offered foreign partners the option of staying as minority share holders or get out of the country. Exxon and Conoco refused the first option and filed arbitration for compensation, while France's Total SA
TOT, -1.03%
and Norway's StatoilHydro ASA
STO, -1.25%
chose to stay.

Venezuela and Exxon may have to wait at least three to four years for a final court ruling, Esteruelas said.

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